All posts tagged Spain

If the stock market is any gauge, investors seem to believe that the Spanish government’s decision to take control of Bankia and to inject billions of euros into the struggling lender is supportive for everybody else: Most Spanish bank stocks rose Thursday, while Bankia fell to a new all time low.

Still, the government seems to be finally “taking the bull by the horn,” to quote JPMorgan’s latest research on Spain. That is, Spain is facing up to its massive real estate problem.

This is because dealing with Bankia is just one of a battery of measures the government is planning to approve this Friday.

Two Spanish banks–Banco de Sabadell and Banca Civica–saw their credit ratings downgraded to junk status. If these banks had access to public debt markets, this would make it far more difficult for them to sell bonds without accepting a much higher cost of borrowing.

The Spanish and Italian equities markets are back to within spitting distance of their post-financial crisis lows.

This reflects not only investor fear about the euro’s stability and that these economies will struggle with recession for a long time to come, but the knowledge that governments struggling to finance budget deficits will eventually go to wherever the money is.

Valencia is to Spain what California is to the U.S. and bond markets are increasingly taking note. That isn’t because it too has (mostly) reliable sunshine, beautiful beaches and juicy oranges, but because it has amassed more debt than it can comfortably manage.

After a massive spending and construction binge, the region has been left with Spain’s biggest credit-fueled hangover.

As a result, much like the Golden State in the U.S., Valencia is Spain’s wobbliest regional credit. That was underlined this week by Moody’s Investors Service after it pushed Valencia’s debt rating deeper into junk territory. It is also coming through in bond markets, given the fat premium demanded these days by investors on Valencian debt.

The yield on existing Valencian government bonds–a yardstick for the annual interest rate that the Generalitat Valenciana would have to pay if it tried to raise new funds from the capital market–was quoted Friday at between 14% and 20%, depending on the length of the loan.

By contrast, comparable one-to-six-year Kingdom of Spain bonds yielded between 2.75% and 4.3%%, having come down sharply after a successful series of sovereign auctions. That yield gap–or spread–has ballooned since mid-November by more than 12%.

By any measure that is an eye-popping and potentially cataclysmic move, even after taking into account the highly illiquid nature of regional Spanish bond markets and the magnifying effect that might have on price moves.

With Spain’s parliament due to appoint opposition leader Mariano Rajoy as the new prime minister in a matter of days, the country’s big banks are doing their part to avoid being seen as the lynchpin of Spain’s financial crisis. Not least, experts suspect, to avoid a costly clean-up of the sector.

This is further evidence that, as they previously said, Spain’s big banks are moving fast to sell off assets to meet stricter capital criteria next year–instead of resorting to straightforward capital increases that look risky at a time when demand for Spanish equity in jittery global markets is rather low.

That is good news for Mr. Rajoy, since he’s already pondering whether Spain’s banking sector needs a €100 billion bad bank to suck in all the property loans gone bad over the last few years. If he doesn’t have to worry about Santander’s and BBVA’s capital levels, that’s one problem less for him.

Triggered by hopes of a comprehensive euro-zone deal and fresh central bank liquidity, equity markets have taken off this week.

But these measures are largely designed to prevent the sovereign debt infection from bringing down Italy and, therefore, the currency union. What happens to where the infection first flared up: Greece?

The upward trend in Greek yields even as they’ve dropped for every other crisis-hit euro-zone country suggests Greece remains more or less where it was before contagion caught hold across the single-currency region. The market says Greece will still default on its debt, and with private-sector creditors taking an even bigger loss than had been factored in by the latest EU deal.

There is no let-up to austerity. A semi-permanent state of austerity, GDP contraction, government deficits and lack of access to the credit markets will only feed popular resentment among Greeks towards the EU.

The only real alternative is for Germany and France to fully absorb a Greek default, including losses on debt held by the ECB, and to show willingness to a slower Greek economic restructuring, less austerity and more forbearance on Greek deficits.

Another day another blunderbuss permanent solution to save the euro zone forever and to stave off panic.

After the rising tide of panic during the past couple of weeks that sent yields soaring on euro-zone government debt and even caused investors to turn their backs on German debt, reports that euro-zone governments have finally come up with a plan, a real plan this time, sent equity markets soaring.

These short squeezes are symptomatic of investors’ general panickiness. They stampede out of assets when they worry things are going bad and then back into them when there’s the risk something might be resolved. Hence the very high correlation between assets, within asset classes, between countries and any other permutation you might care to name.

So is the latest version likely to be any better than the rest of the failed agreements and half measures launched during the past year or two?

Breaking news: The incoming Spanish prime minister calls a news conference next week. There, Mariano Rajoy tells reporters that he and his new ministers have crunched the numbers and decided that the only way out for Spain isn’t to cut expenditure any further, but for the country to spend its way out of trouble.

Cue gasps all round.

In reality, the market is telling Spain to jump in terms of budget cutting, and it looks at the moment as if the only thing Rajoy and Co. are deciding is how high.

But such a plan holds no logic. With unemployment already at 21% and growth stagnating, why would you cut more when your indebtedness is a staggering 20-plus points below the European Union average? In other words, your balance sheet is dramatically overcapitalized.

The John Maynard Keynes doctrine of deficit spending is the Greenspan put the market needs to boost aggregate demand in Spain. Europe as a whole, currency stability and return on capital for opportunistic bond investors would benefit, too.

Read on.

Fiscal austerity alone won’t do the trick, and nor would the creation of euro bonds help, with the latter option ultimately triggering debt-pile indigestion for Germany and spurring the inevitable issue of identifying and pricing the quality of the underlying collateral with the European Central Bank. The ECB needs to print money to create natural support for sovereign debt, thus inevitably having to amend the EU treaty. That’s where Milton Friedman comes into play.

Following Sunday’s landslide victory for his Popular Party in general elections, incoming Prime Minister Mariano Rajoy will embark on a race against the clock to fix the euro zone’s fourth-largest economy before the region’s sovereign debt crisis fully engulfs Spain.

Monday saw no respite in the sell-off of Spanish financial assets. Spain’s risk premium, which measures the spread between Spain’s 10-year bond and the benchmark German bund, rose 28 basis points to 466 basis points.

More important for investors than the change of government in Spain is the need for European Union institutions to extend more support for the ailing euro-zone periphery, possibly by converting the European Central Bank into a lender of last resort.

Still, analysts said, Mr. Rajoy has work to do to burnish his reformist credentials because his announced plans have been short on detail. Providing more concrete information in the weeks ahead will be key to maintaining Spanish access to markets ahead of the large debt issuance due in 2012.

According to PriceWaterhouseCoopers, in addition to government financing needs of around €150 billion next year, Spanish banks will have to raise around €120 billion–three times more than in 2011–while non-financial corporations will have to raise around €30 billion. Most Spanish banks have had serious difficulties issuing debt this year and have come to rely on the emergency liquidity facilities of the ECB.

As Mr. Rajoy gets to work, these will be the short-term milestones to watch:

Thursday, Dec. 1: Spanish bond auction, first after the election (even though there will be a less significant Treasury bill auction Nov. 22). A continued rise in yields, in line with recent trends, would be an indication that investors don’t really expect much from the new government. Not nice at all, because the game is all about confidence now.